A consultant whose study indicated that the vast majority of the industry finds the current way that paint and materials compensation is calculated is a poor methodology is now saying more accurate and fair calculation systems exist, are being used by some shops and are being accepted by some insurance companies.

“The most important message here is that by properly presenting itemization and documentation using a paint material calculation system, we are actually able to resolve these conflicts,” consultant Steve Lanza of Richfield Associates said at the Collision Industry Conference (CIC) held in Phoenix in April.

Lanza’s firm in 2012 released its findings that compensation for paint and materials has not kept pace with increases in the costs of these products, and that 64 out of 68 industry participants interviewed think the current way paint and materials compensation is calculated is a poor methodology. Only four people (including representatives of three repairer operations and one estimating system provider) rated the current system as “adequate” or “good.”

The study concluded the current system is flawed in part because on smaller jobs, repairers do not receive adequate compensation, and for large repair jobs, insurers believe materials charges become excessive.

It also found that while average costs for paint and materials have grown by 50% since 2005, the average compensation rates paid by insurers have risen by only 23%. Lanza said that even some repairers he spoke with who don’t currently have a problem with the system are concerned about the future given this continuing disparity in the growth of costs versus compensation.

“Of the individuals I spoke with, 78% agreed that in order to keep up with industry standards and keep pace with future cost increases, we need to do something, and they agreed that a alternative calculation system has to be implemented,” Lanza said.

Continued researchMore recently, Lanza’s firm was retained by Highway CARSTAR Collision in Chagrin Falls, OH, a shop owned by Lanza’s father Frank, to do more research into the alternative methods of calculating paint and materials compensation. The current system, while certainly the easiest, is probably the least fair and accurate, Lanza said. Use of a paint scale with a ratio factor for other types of materials was seen as being less easy to use, but somewhat more accurate and fair. Use of a paint and materials calculator also seemed more fair and accurate and yet easier to use. But, Lanza said, not all paint and materials calculators are the same.

“We took a look at over 1,000 estimates from more than 20 different shops,” Steven Lanza said. “We looked at various size jobs with various paint lines. We determined there are differences between alternative paint and materials calculation systems.”

Some of the calculators take the surface area of the panels being refinished into account, for example, Lanza said. Others are still based on refinish hours or some other system.

Frank Lanza said he has researching the topic for more than three years, with data comparing the various systems on more than 3,000 estimates. He said he has tried five calculation systems, “finding different flaws in each one of them,” but that some are better than others in terms of offering a “a fair and accurate solution.”

For his own shop, he said, he chose a system that uses list (or “user”) prices for paint and materials. What shops actually pay can vary based on many factors, he said, but list prices are published and consistent nationwide.

“The major issue that I found with the calculators that I didn’t (choose) is they were based on cost and allowed the shop to put their own mark-up on it,” Frank Lanza said. “Well, I bet if I asked, everyone in here has a different cost depending on your volume and who your distributor is and what kind of products you’re using. And everybody has a different idea of what the mark-up should be. So what I tried to do was to be consistent, and so that’s the reason I use the list price as opposed to cost.”

Benefit to insurersHe said one thing that works in insurers’ favor with paint and materials calculators is that the system can distinguish which items have sales tax that must be charged to the insurer by the shop and which do not.

“In our state, the shop has to pay sales tax on certain items that do not leave with the car,” Frank Lanza said. “What happens is if you group paint and materials all together into one item, and then it’s taxed, that is really double taxation. The insurance company might care about that.”

In one example shown at CIC, for example, separating out taxable and non-taxable paint and materials would reduce by $9.25 the amount the insurer would have paid under the current system of just multiplying labor hours by a materials rate.

One shop owner at CIC said the paint and materials calculators are probably a more accurate and fair way to determine compensation, but in his experience insurers won’t accept the itemized invoice the systems produce.

Frank Lanza disputed that assertion.

“There are parts of the country, where the calculator is the prevailing competitive price. Insurance companies are accepting it,” he said. “So it’s up to us to prove to the insurance company this is what we need.

I’ve been in business for 41 years. I have never had an insurance company that cheated me. I never have. I would rather work with an insurance company than a customer-pay any time. Because you know with the insurance company, you’re going to get paid. If you can prove (the costs) to them, they will pay you.”

John Yoswick, a freelance writer based in Portland, Oregon, who has been writing about the automotive industry since 1988, is also the editor of the weekly CRASH Network (for a free 4-week trial subscription, visit www.CrashNetwork.com). Email at: jyoswick@SpiritOne.com.